A murky past comes back to haunt chief securities regulator

The chairman of the Securities and Exchange Commission has a past that is fast coming back to haunt her.

Mary Schapiro's story has none of the lurid details of philandering celebrity golfers or hedge fund titans who get sued by ex-wives for concealing marital money.

Her history and two pending lawsuits, though, raise an important question for investors: Is the woman who oversees the US financial markets someone willing to fudge the facts to get things done?

If what I heard in federal Judge Jed Rakoff's New York courtroom last week is even close to accurate, I'd say that it's time for some serious conversations as to whether Schapiro is the person we should entrust to the top SEC job.

Schapiro was chief executive officer of the self-regulatory organisation National Association of Securities Dealers in 2006 when it and the New York Stock Exchange decided to combine their regulatory operations, which ultimately became known as Finra.

NASD pulled out all the stops to pitch the deal, putting on a 26-city promotional tour to persuade its 5,100 members to vote to change the bylaws so the merger could get done.

Proxy statement

To hear NASD's take on the transaction, outlined in a December 14, 2006, proxy statement, in notes from the roadshow, in a telephone pitch script and in a video promo by Schapiro, it was an early holiday gift to members, offering the chance to reduce duplicative regulation once the two regulators joined as one. Additionally enticing was that, in anticipation of cost savings, NASD would pay $35,000 (Dh128,450) to each of them.

Ungrateful though it might sound, two Finra member firms sued Finra, Schapiro, and other Finra officers. Standard Investment Chartered and Benchmark Financial Services said in lawsuits filed in 2007 and 2008 that the defendants breached their fiduciary duty, misled brokers about the merger terms, shortchanged the brokers in the payment, and unjustly enriched themselves with soaring compensation.

Schapiro's compensation rose to $3 million from $2.1 million once the combination was completed in July 2007.

Chief among their claims is that Schapiro and NASD lied when they told members the organisation couldn't pay more than $35,000. "Based on our consultation with the Internal Revenue Service, a larger payment is not possible," Schapiro said in a webcast to members.

How she knew that before members voted in January 2007 remains a mystery: the IRS letter to NASD on the matter was dated March 13, 2007. $35,000 is chump change to a big brokerage firm.

But for smaller NASD members — 672 of them had revenue of less than $75,000 in 2006, according to a voting analysis produced by NASD in the litigation — it sounded like real money.

Larger payment

The proxy assured them "a larger payment is not possible" because of laws governing tax-exempt organisations. The NASD cited IRS rules in a similar line in a telephone script dated December 20, 2006, and produced by NASD in the litigation.

What the IRS really said remains under seal at the insistence of Finra. In court on December 16, though, it began to look like that $35,000 number was low-balled by a significant amount.

Rakoff asked a lawyer for Standard Investment and Benchmark, Jonathan Cuneo of Cuneo Gilbert & LaDuca LLP, what damages he was claiming on behalf of his clients.

Finra continues to fight to keep the information under seal. Bloomberg News and two other news organisations have asked Rakoff to open the files. He will hear arguments on January 14.

Schapiro was one of NASD's biggest cheerleaders for the NYSE merger. She may come to regret ever saying that the IRS wouldn't let her member firms get a penny more than they received.